Franchise Law: Agreement Duration – Part 2

Video Transcription

Hi. My name’s Jeff Goldstein of the Goldstein Law Group. We represent franchisees in cases throughout the country. We’re located in Washington, D.C. Today, I wanted to speak to you for a second time about the issue of duration of franchise agreement. And we noted in the first tape that franchise agreements and distribution agreements don’t necessarily always have an end date, a termination date in the agreement, nor do they necessarily always include a period of time, 5 years 10 years, months, what have you. In those cases, these kinds of franchise agreements will get to my office as a result of a franchisee having been terminated by the franchisor. Franchisor is saying, “Since there’s no date in the agreement and there’s no period of time, under the common law we’re allowed to terminate you at will, whenever we want, for any reason.” And under that rule the franchisee would have the same symmetrical right to terminate the franchisor, if that were the case.

Franchisees, over time, have made some headway in this by arguing that, even though there’s not a date and even though there’s not a period of time, a number of years set out in the agreement, there are other provisions in the agreement that would protect the franchisee from an at-will termination. Usually, a franchisee will focus on performance clauses, for best efforts clauses and termination clauses that say the franchisor is permitted to terminate a franchisee on the following events, the occurrence of the following breaches, or poor conduct or failures to meet performance requirements. Some cases will look at those types of provisions and find that the franchisee is permitted to argue that the franchise agreement cannot be terminated at will, but can only be terminated pursuant to those provisions. Other times, courts have looked at the same provisions and found them insufficient to bar a franchisor from terminating them at will.

An interesting case in this regards a rustproof car franchisor, Ziebart, and this was out of a federal circuit court. And in that case, the franchise agreement went on for 20-some-odd years, and there was no date specific in it and there was no term of years. And the parties proceeded to operate as though there could only be a termination with cause. And the franchisee refused to sign renewal agreements and the franchisor never called its bluff. The franchisor then figured out, regardless, whether it was a contract at-will or not, it would be able to terminate the franchisee for cause. So, it trumped up a standards violation and terminated the franchisee. When it got into court and it was found that the franchisee had not violated that performance standard, the next question was whether the termination by the franchisor was permissible or wrongful. And the franchisor, at that point, was forced to argue that the contract was terminable at-will, and the franchisee obviously argued, “No, it could not.” There were very specific and comprehensive termination provisions in that agreement that would have prevented from being terminated without good cause, and the court had already found that there was not good cause, there was no performance violation.

The court had a very good paragraph on this that summarizes how many courts would rule in favor of a franchisee in terms of imparting some duration to the contract and preventing an at-will. And the court stated, “The inclusion in this agreement of a specific right to terminate for cause, especially a right limited by the requirements of a license, be given notice of the asserted breach and an opportunity to remedy the default, militates against the construction of the agreement that the licensor can terminate at will.” So, this goes back to the concept we discussed in the first video on this, as well as the second, that depending on the court you’re in, the state you’re in, and also depending on how comprehensive and how specific the language is in the termination provisions, or in other provisions, performance standards, for instance, that may be a legal out for the franchisee.

Thanks for watching today. And if you have any questions relating to this or other franchise issues, please feel free to give me a ring, 202-293-3947, in Washington, D.C. I look forward to speaking to you.

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Jeff, I am amazed that you were able to get the liquidated damages down that low, which allowed us to avoid bankruptcy. Until we retained you we had been dealing with hotel consultants who appeared to make little head-way in lowering the liquidated damages.